Might “availability heuristic” “availability bias” explain the loony risk weighted bank capital requirements?
"The availability heuristic, also known as availability bias, is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision. The availability heuristic operates on the notion that if something can be recalled, it must be important, or at least more important than alternative solutions which are not as readily recalled. Subsequently, under the availability heuristic, people tend to heavily weigh their judgments toward more recent information, making new opinions biased toward that latest news.
The availability of consequences associated with an action is positively related to perceptions of the magnitude of the consequences of that action. In other words, the easier it is to recall the consequences of something, the greater those consequences are often perceived to be. Most notably, people often rely on the content of their recall if its implications are not called into question by the difficulty that they experience in bringing the relevant material to mind"
Could that explain why the world, so submissively, has accepted the regulators' bank capital requirements based on that those excessive exposures that could be dangerous to bank systems are built-up with assets perceived risky, and not with assets perceived as safe?
Has the immediate example of the certainty of Monday Morning Quarterbacks, informing them about the awful consequences of what was very risky after the game, totally blocked regulators from even looking at what was considered as very safe before the game?
Cass Sunstein
Daniel Kahneman
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